Silicon Valley Bank 4Q15 Earnings Call Notes

Greg Becker

Expect another strong year

” We expect another year of strong growth in loans and fee income as well as continued solid credit quality. This expectation of course assumes no material change in the business environment for our clients. While volatility and investor uncertainty, present a challenge for the markets overall and the interest rate outlook is still unclear, we believe new company formation, investments and exits among our clients will remain sufficiently healthy to fuel our growth.”

View recent volatility as healthy

“We’re keeping an eye on valuations, exits in the extreme market volatility we’ve witnessed so far in 2016. We view recent valuation pullbacks as healthy adjustments with the potential to reduce frothiness in the markets and refocus companies and investors on positive cash flow as a priority.”

Our clients continue to do well despite the “unicorn flu” going around

“we are optimistic about the year ahead based on the performance we’ve seen from our clients and their industries and our expectations that we’ll continue to execute on our strategy. Our innovation clients continue to drive their business forward regardless of the Unicorn flu that has been going around. Our long experience, relationships and insights into the markets we serve gives us access to many of the best companies and investors and enables us to deliver strong growth without compromising on quality.”

Loan growth strong at end of the year because of capital call lending

“What we saw at the end of year, as we did the prior year not to some extent was a run up in capital call lending at year end, but mainly competitive equity partners, that’s number one.”

We haven’t seen any slowdown during the recent volatility

“just over the last week as this volatility has been obviously very active and we have also experienced it, the number of rounds that we have seen closed that have been in the $25 million to $50 million to $75 million levels of activity, actually is consistent with what we saw in the third quarter and the fourth quarter of last year, although it’s just a much very short time period. So that’s a very recent data point kind of to give you an example. We haven’t seen any slowdown, that’s number one.”

Investors have raised funds

“Number two is, as we spend time talking to investors and to capitalists, they have raised funds. But last year was a good fund raising year and money is coming in from a variety of different areas and the number of innovation companies is very broad. So we do still see that the activity levels although they might slow down are still going to be very healthy, that’s kind of a broad umbrella.”

Also optimistic for loan growth because as companies get larger, they are relying more on debt financing

“The second piece is a lot of the rounds that were the big fundings last year were to these larger and later stage companies. And these are companies that historically we would have seen working capital borrowings, we would have seen acquisition financing, we would have seen other sort of borrowings that we didn’t see because there was so much equity capital going in. So from that standpoint we believe utilization could actually increase in some of the working capital facilities, as these companies get closer to profitability and are doing traditional working capital financing and not relying on equity. So those are kind of the reasons that we look at why we are still optimistic about loan growth in 2016.”

Where there has been weakness it’s in earlier stage companies

“where we would see weakness, if there was, rounds that didn’t close and companies have struggled to get equity raised would be in early stage. And so from that standpoint we want to make sure to all of our members that, that’s a small portion of our overall portfolio roughly 8% of our overall loan portfolio”

Lower VC funding seen in 4Q is a healthier level

“You could look at the venture capital numbers in the fourth quarter, roughly $11 billion, depends on what data source you look from. The number was $58 billion for the year, the $44 billion annualized level, we look at that and that’s a more normal level. I wouldn’t be surprised, if you kind of see that number carry forward into 2016 on a quarterly basis. So that’s still a healthy number, number one.”

There is more corporate venturing than we’ve ever had

“There is still more corporate venturing than we’ve ever had and I believe this time, I have spent the time with several of them. And they are not — their approach isn’t a short-term from my standpoint, go in and try to make some money, it’s more strategic and here is what’s different about it this time compared to last time. Companies have to look at investing in new disruptive technologies to protect their business and to grow their business more than ever.”

Didn’t see any change in behavior in 4Q

“last point, which is your first question is, did we see any change in behavior in the fourth quarter and the answer was no we didn’t.”

Losses come from the early stage companies and only 8% of our portfolio is to early stage

“here is an important point, when we see the stress in the portfolio we keep referencing back and I’ll reiterate that 8% of the portfolio is at early stage. That’s where you see the stress. That’s when we would see a big impact. But if you look at that and even if you had a 10% loss in that, you’re looking at 80 basis points across the overall portfolio.”

The innovation economy is doing fine in China

“in the innovation economy, in China continues to be on an uptick. And you think about it, what’s happening in China actually ends up not being negative for the innovation economy. So China has got two different markets, they have innovation economy and the old economy. Old economy is one that’s struggling and they’ve got to figure how to balance that. So which means that more than likely, they’re going to reemphasize or increase their emphasis on innovation economy which from our standpoint bodes well. ”

Mike Descheneaux

Not planning for any additional rate increases

“Our outlook reflects the impact of the 25 basis point Fed funds increase we saw in December 2015 and assumes no additional rate increases in 2016. If there were any rate increases in 2016, we would adjust our guidance accordingly.”

Didn’t see anything odd from investor behavior. Did see encouraging moves from companies to prioritize cash flow over cash burn and to have more liquidity on their balance sheets

“One of the things that we did not see was anything out of pattern in connection with investor behavior. But we did see one thing that was encouraging in terms of the companies themselves and that was so to speak, an increasing number of companies starting to prioritize positive cash flow over cash burn for revenue growth. Putting back together with what on average in our borrowing client base would be a fairly robust balance sheet liquidity. The combination of prioritizing positive cash flow and having more cash on the balance sheet than usual given the fund raising environment, yes, I think helps give me some comfort that we’re not going to see anything that would hopefully impact or change our guidance for credit quality.”

We haven’t seen any down rounds really. There probably will be, but we think it’s good

“you said that we have a good visibility to up rounds and down rounds and again what we saw through the fourth quarter was no, I’ll call meaningful, and I honestly can’t even think of any or many down rounds that we saw. Do we think that’s going to change, so that’s going to change. But when you look at it, the market — these companies continue to still perform, it’s a broad statement, perform at a very high level, number one. Number two, going to back to what Mike said, they’re refocusing their efforts on growing and becoming cash flow positive. We think those are good signs and there is availability of capital. So we don’t believe it’s going to be a complete shrinking of capital in 2016. So that down rounds are going to be the norm but of course it will happen. So we expect it to be lower than last year, absolutely, but we’re still feeling okay about the outlook.”

M&A has stayed pretty healthy

“sometimes unfortunately we get some bad press or headlines that all the IPO activity has slowed down or ended, but the reality is a lot of the exits from whether its warrants or in investment gains really comes from M&A and again that has demonstrated over the past year that’s pretty healthy and is likely probably to continue at least a healthy clip.”